Can India-heritage providers maintain impressive gains in outsourcing?
The most recent quarterly ISG Outsourcing Index found that India-heritage providers have not only been steadily increasing their market share, but also within an overall static market – making the growth all the more impressive.
Between 2009 and 2012, India-heritage providers increased their share of global market annual contract value (ACV) by 13 per cent while in the same period, Western-heritage providers’ share declined by seven per cent.
This difference has been principally attributed to low-cost service delivery – a “game changer” in the global sourcing market – with the gains enjoyed by India-heritage providers coming at the expense of their Western counterparts.
Interestingly, the majority of contracts won by India-heritage providers have been in the United States and United Kingdom, rather than in India, where historically the bulk of contracts have gone to Western competition. However, these India-heritage providers are now beginning to expand into continental Europe, Asia-Pacific, and also into India.
Revenues between the two groups of service providers have also witnessed an interesting shift. Between 2005 and 2008, Western-heritage providers grew at a seven per cent combined annual growth rate (CAGR), compared to an impressive 32 per cent for India-heritage providers.
However growth is now slowing, with high levels of market penetration reached, so the onus on these providers is to find ways to progress by expanding into solutions and industry-focussed software products.
So, how can these providers maintain their upward trajectory? Our pointers are below…
1. Winning the restructuring market
India-heritage providers have already captured second- and third-generation deals, yet will need to secure more in order to sustain their growth. There is no question that incumbency isn’t what it used to be; today the non-incumbent win rate on competitive restructuring deals stands at 59 per cent, with many shifting away from Western-heritage providers. However, as clients become more comfortable with switching providers and managing the associated costs, hard-won business by the India-heritage providers will itself come under threat at renewal time.
2. Capitalising on the growth of business process outsourcing
A second, and less challenging, growth opportunity is business process outsourcing (BPO), as it is a newer segment of the outsourcing industry. With market share at just 36 per cent, there is plenty of opportunity for India-heritage providers to grow in what appears to be a bright segment of the outsourcing industry right now. Sustained growth will require not just success but dominance of the BPO market.
3. Cracking the global public sector
Although protectionist behaviours are natural in the public sector outsourcing space and will continue to inhibit growth, opportunities still exist. Public sector contracts are large, complex deals that are expensive to win, but they are also sticky and profitable. India-heritage providers will need to continue to expand local presence and act more like Western-heritage firms – with a strong onshore capability – to truly succeed in the public sector.
4. Increasing market share in continental Europe
Continental Europe remains a challenge for India-heritage firms. While the UK has been nearly as good a market as the US for these providers, over the last three years only 60 per cent of the transactions ISG advised in continental Europe had offshore scope. While that is nearly a 20 per cent increase from the prior three-year period, it still leaves plenty of room for opportunity. To sustain growth in continental Europe, India-heritage firms must continue to address the language and labour barriers.
Sid Pai is Partner and President, ISG Asia-Pacific.